I am a long term buy and hold investor who focuses on dividend growth stocks

Wednesday, July 18, 2012

Dividend Growth Index, 2012 Q2 Update

Back in September 2011, several dividend bloggers and I launched a dividend growth index. Basically, each one of us selected three income stocks, and the end result was a moderately diversified dividend portfolio. The three stock picks I selected included Enterprise Product Partners, McDonald’s and Chevron. You can read the reasoning behind each selection in this article:

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend aristocrat has boosted distributions for 35 years in a row. The company boasts a 10 year dividend growth rate of 27.40%/year. The latest increase of the quarterly dividend was 14.75% to 70 cents/share. McDonald’s earned $5.27/share in 2011, and analysts expect it to earn $5.58/share in 2012 and $6.17/share in 2013. Future profitability will be closely tied to same store sales performance, innovations in the menu and ability to expand in key international markets. Currently, the annual dividend payment of $2.80/share is adequately covered. I expect distributions to be in the low double digits for the foreseeable future. The stock has returned a negative 6.60% so far in 2012, and 8% since the selection on Sep 23. Currently, McDonald’s is attractively valued at 17.50 times earnings and yields 3%. Check my analysis of the stock.

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products, and petrochemicals in the United States and internationally. This dividend achiever has boosted distributions for 15 years in a row. The company boasts a 10 year dividend growth rate of 27.40%/year. Over the past year the quarterly distribution was boosted by 5% to 63.50 cents/unit. Currently, the annual distribution of $2.54/unit is adequately covered from distributable cash flow. Future growth in distributable cash flow per unit will be closely tied to expanding its pipeline asset base, growing volumes through it and ability to raise prices for transporting carbons on its vast pipeline network. I expect distributions to be in the middle single digits for the foreseeable future. The units have returned 13.30% so far in 2012, and 31.10% since the selection on Sep 23. Currently, Enterprise Products Partners is attractively valued and yields 5%. Check my analysis of this master limited partnership.

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has boosted distributions for 25 years in a row. The company boasts a 10 year dividend growth rate of 8.80%/year. The latest increase of the quarterly dividend was 11.11% to 90 cents/share. Chevron Corporation earned $13.44/share in 2011, and analysts expect it to earn $13.03/share in 2012 and $13.54/share in 2013. Future profitability will be closely tied to prices of crude oil and natural gas, as well as the company’s ability to replace reserves successfully. Currently, the annual dividend payment of $3.60/share is more than adequately covered. I expect distributions to be in the high single to low double digits for the foreseeable future. The stock has returned 1.30% so far in 2012, and 20.70% since the selection on Sep 23. Currently, Chevron is attractively valued at 7.90 times earnings and yields 3.40%. Check my analysis of the stock.

The three companies have generated a 20% return since Sep 23, versus 21.50% for the S&P 500 (total returns). Overall, these companies present solid long term selections that I plan to hold in my income portfolio for the next several decades. In order to be successful at dividend investing, I do recommend that a portfolio consists of at least 30 individual securities.

The other dividend newsletters submitting stock selections for the dividend growth index include:

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